Analyst sees shale gas as big part of U.S. energy future

Posted July 1, 2010

By Michael BradwellObserver-Reporter

Halfway through Fred Sturm's discussion about the growing role of natural gas in the U.S., he shows a chart about oil consumption to drive home his point. In the 1950s and 1960s, he said, oil companies around the world were finding the equivalent of 50 billion barrels a year, but the U.S. was using only around 10 billion barrels a year.

Moving across the slide, Sturm shows the current state of oil use that literally stood the first ratio on its head. "We're now using 50 billion barrels a year, but finding only 10 billion a year," he said.

Sturm, a financial analyst and senior vice president for Toronto-based Mackenzie Financial Corp., manages the firm's Ivy Global Natural Resources Fund, whose portfolio includes $5 billion in assets invested in everything from forest products to oil, coal, natural gas and copper. In short, Sturm has his finger firmly on the pulse of the global commodities market.

The fund's top holding, at 5.6 percent of its widely diversified portfolio, is coal producer Alpha Natural Resources, which recently began drilling its first Marcellus well in Greene County.

On Tuesday, during a half-hour discussion at Southpointe Golf Club, he told about 90 members of the Washington County Chamber of Commerce that natural gas being extracted from the Marcellus Shale strata here as well as from other unconventional shale plays around the country will become a critical part of this country's energy market. Sturm's appearance was sponsored by UBS, which recently opened a brokerage office in Southpointe II.

One of the reasons Sturm is bullish on natural gas as a fuel is the fragility of the current oil-based energy system that involves importing much of America's oil demand on a daily basis from halfway around the world.

"Three out of four cars don't start tomorrow if a ship doesn't arrive here every day," he said. Then, he added, there's the rapidly growing demand equation on the other side of the globe, where China and India are developing middle classes that are clamoring for cars, which puts even more pressure on world oil supplies.

While opening up Iraq's oil fields to full production could help to displace some of the oil demand by as much as 2.5 million gallons per day, Sturm said, "just don't hold your breath" waiting for it to happen, given the country's political climate.

The need for reliable energy in high-demand places like India and China also is underscored in daily shutdowns of some power plants in those countries, Sturm added.

"How productive would Southpointe be if we had to shut off the power for two hours every day?" he asked the audience.

While Sturm sees natural gas produced from the Marcellus as an indispensable part of America's energy future, he said nuclear energy would also be a viable solution if people are willing to deal with burying the spent fuel. He said he also believes the U.S. has the potential to become "the Saudi Arabia of wind energy," noting the giant swath of Great Plains states from the upper Midwest south to Texas as a place for wind energy production to thrive. However, he warned that a potential scarcity of copper, necessary for building out the power delivery infrastructure from the wind farm to users elsewhere in the country, could make it difficult to realize.

"It will take a lot of copper and it's going to take time" to build out the infrastructure, he said.

Despite those concerns, Sturm said Mackenzie believes that America "will muddle through" the current energy challenges, adding that the natural gas industry "has finally began to get through to the lobby in Washington to say, 'Believe in us.'"

"We'll come up with solutions," he said. "America is going to impress itself within the next 10 years."

The optimism was tempered with a caveat when someone asked whether natural gas production would grow to the point where it could become an export.

"Hold on to what you want here," he said. "The Chinese would love to become your partner, but they tend to want to take as much as they can."